To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

11/17/2010

JPMorgan and HSBC under fire for rigging silver prices

A slew of anti-trust lawsuits against JPMorgan Chase & Co and HSBC Holdings Plc questioning their role in manipulating the futures market for silver, is stoking debate -- and investigation -- on the extent of influence these big global banks exert in commodity markets and if that constitutes unfair advantage.

The outcome of these lawsuits and a probe by the US’ Commodity Futures Trading Commission (CFTC) is expected to nail reasons behind huge volatility in the futures and options market for silver as well as shape regulatory oversight in the trading of commodities.

Although “naked short selling” has been a serious issue for long on the Wall street, Steve Berman, managing partner at Hagens Berman Sobol Shapiro LLP, one of the firms that has filed a lawsuit, said it was the “the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme (that) dwarfs any other similar attempt to manipulate a commodities market."

New York-based JPMorgan and London-based HSBC have not commented on this issue so far. The Seattle-based class action litigation firm has filed the case on behalf of an individual investor Carl Loeb.

‘Naked short selling’ refers to the practice of selling a financial instrument without owning it and without making arrangements to borrow it later to settle the transaction. Traders in such scenarios bet that they will buy the instrument later when the price crashes and pocket the profits.

“The extent of damage depends on how wide you cast your net since there are concentric circles of liability. One estimate pegs it at $100 million,” said Sean Matt, a partner at Hagens Berman over a call.

The two banks, in this case, are under fire for having amassed huge short positions with an intent to allegedly depress its prices and book profits as they controlled more than 85 percent of the commercial net short position in silver futures contracts. JP Morgan built on its silver short positions even more after its March 2008 acquisition of investment bank Bear Stearns. Another lawsuit by Kaplan Fox & Kilsheimer LLP on behalf of an unnamed individual investor claimed that the manipulation was on as recently as March 2010 when a whistleblower, a metals trader based in London, reported the scheme to the CFTC.

Matt said that as many as 20 class action complaints had been filed against the two banks but explained that most of them were anti-trust claims while his firm was charging them with “violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act.” “We have no direct legal precedent per se for so many shorts in one market,” he added.

Bill O'Neill, managing partner at New Jersey investment firm Logic Advisors, said that silver market has a history of very high volatility – in 1980s when the Hunt Brothers’ case was probed -- and rallies along with gold since the same fundamentals apply to both the metals.

Silver, however, “doesn’t have a huge and global cash market unlike gold,” making it a “speculative playground” suitable only for the big boys, he explains.

CFTC has already proposed regulations for greater power to thwart price manipulators in October-end. When asked about its probe on silver futures, its spokesperson Scott Schneider declined to comment on any impending investigation.

One of the CFTC commissioners Bart Chilton, however, had spoken publicly in October on how “the public deserves some answers to their concerns that silver markets are being, and have been, manipulated.” If the government oversight body has to nail these banks, it will have to prove their ability to influence prices, specific intent to do so and that artificial prices existed.

Not everyone is buying the conspiracy theory though. “Silver is volatile and that leads people to believe it must be rigged. Lawsuits by these individuals against two big corporations is really jumping the gun,” said O’Neill.

An analyst tracking JPMorgan with a New York-based brokerage, who did not wish to be named, said he hadn’t been following the lawsuits much. This hardly seems an outlier amongst the analyst community since most of them seem to be overlooking this for now. No report on either JPMorgan or HSBC has been published by brokerages since the outbreak of these class action lawsuits nearly three weeks back, according to New York University library databases.

"Silver lawsuits will have no impact in short-term, if ever. Most likely they will be thrown out,” said Ned Schmidt in his Value View Gold Report explaining that “the CFTC tests for manipulation are well established, and extremely hard to prove."

He may have a point. Only once in its entire 36-year history has the regulator successfully concluded a manipulation prosecution, in a 1998 probe on prices for electricity futures.

Comments

You can follow this conversation by subscribing to the comment feed for this post.

I read your post . it was amazing.Your thought process is wonderful.The way you tell about things is awesome. They are inspiring and helpful.Thanks for sharing your information and views.
options trading

This post is really nice and informative. The explanation given is really comprehensive and informative. I am feeling happy to comment on this post. I think this is useful information for users-How does the ordinary investor fit into the equation comprising of global factors coupled with manipulation in the stock markets.